Fiscal Adjustment After a Banking Crisis

This new IMF paper studies fiscal adjustment in the wake of banking crises. One empirical finding is that large fiscal gap require increases in revenue in addition to expenditure cuts.

Summary: This paper analyzes the experience of 99 advanced and developing economies in restoring fiscal sustainability during 1980 – 2008 after banking crises, which led to large accumulation of public debt. It finds that successful debt reductions have relied chiefly on generation of large primary surpluses in post-crisis years through current expenditure cuts. These savings have been accompanied by growth-promoting measures and a supportive monetary policy stance. While these results are consistent with the existing literature, the paper finds that revenue-raising measures increased the likelihood of successful consolidation in countries that faced large adjustment needs after the crisis. This reflects the fall in effectiveness of spending cuts when deficit reduction needs are large independent of initial tax ratios.

7 thoughts on “Fiscal Adjustment After a Banking Crisis”

  1. Typical IMF drivel – they have no creditability.

    Besides what has the accumulation of public debt got to do with Ireland.

    We are perhaps the most extreme example of huge monetory flows into a economy with little positive capital growth from these vehicles.

    The fiscal debt explosion is merely a phenomena of a credit production halt from our banks.
    The solution is obvious but strangely never discussed in polite conversation.
    The same criminals who were lecturing us about the efficient market hypnosis won’t allow their buddies to fail.
    Systematic banks do not exist in a environment where credit is stopped.
    Lets stop the manure spreading and do some culling.

  2. Initial reaction is that 10 years seems the do-able norm.
    What in Gods name are we sticking to this disastrous 2014 target for?
    Is Suds influencing our government and FG in this for his master?
    2014 is not attainable!

  3. What banking crises were these? The paper doesn’t mention what specific crises were studied. also, the time period is extraordinarily short, especially when the conclusions point to a 10 year recuperation period for a successful resolution.

    1980 to now also happens to be a period when global interest rates were falling and global trade was growing healthily. The fiscal crises mentioned had two massive supports that are unlikely to exist in the next 10 years. That is they could enjoy lower interest rates and they could export their way out of trouble. How likey is it that the US and Europe and Japan, which together account for probably 70% of final consumer demand globally, van all export their way out of trouble. Also, with rates at historic lows, can we expect them to fall by half Gain over the next 10 years.

    One last thing. It is repugnant to me to read that fiscal deficits are higher now than at any time since world war two. That means they are higher than at any time in history probably (I think the napoleonic wars saw uk debt to GDP at 200% and the netherlands had debt of about that much in the 1640’s when it won independence but I stand to be corrected). At no point in modern human history have deficits across the world stood at such high levels. In past periods we could accept this on the basis that the country/system was fighting for it’s very existence. Also, in those past periods, the debtor countries were invariably victors in war and would stand to gain when the vanquished countries’ economies recovered. We can’t expect that today. Instead, we expect our kids to honor debts that we took on to buy shit box plasterboard houses in the middle of nowhere and stuff them with electronic crap and mdf sofas. Are we kidding ourselves?

  4. This should also be viewed in the context of today’s decision to reject automatic sanctions for Euro transgressions.
    Nobody really expects us to do this by 2014.
    But how does one renegotiate the timescale without devaluing the Euro? Is that the rub? Is that where the money will be made on shorting the Euro in 2011-2012? Our failure could be very lucrative for certain bond traders because the Euro would eventually appreciate again as the peripheral drags are kicked out.
    So – it’ s almost checkmate for us. If we go for severe austerity before we fail we’re worse off than if we just fail while we still have young people who can rebuild up the economy.

  5. @Bklyn_rntr: “Are we kidding ourselves?”

    No, mostly not I think, but the legislators are being led around by their testicles.

    Allowing the Irish banks to go into liquidation would have been (and will be in the future be judged) to have been the proper course of action. The subsequent ‘domino falls’ of many european banks would have been the proper lesson to learn.

    The way chosen has some very scary consequences.

    Brian P

  6. Keith Cunneen

    +1 Love the word inventions! Keep it up!

    Bklyn_rntr

    +1. Yes. Sad, eh? This is war, of a kleptocracy that now exists across countries that have “leaders” corrupted by those who are trying to buy the world!

    Eureka, Brian P

    +1. I have made suggestions that we can game this, but if all the official purse strings have been placed into the hands of the enemy, how practical is it? Stops can be gamed to be triggered while a fall or advance is rigged…… The foreclosure mess in the USA suggests disorder, except it too may have been designed to happen. Are there any other surprises involving paper owning OPM? Almost guaranteed, I’d suggest!

    Best to keep out of the messes, and keep a close eye on our real assets: family, friends and community.

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